Forecasting the term structures of Treasury and corporate yields using dynamic Nelson-Siegel models
AbstractWe extend Diebold and Li's dynamic Nelson-Siegel three-factor model to a broader empirical prospective by including the evaluation of the state space approach and by using nine different ratings for corporate bonds. We find that the dynamic Nelson-Siegel factor AR(1) model outperforms other competitors on the out-of-sample forecast accuracy, especially on the investment-grade bonds for the short-term forecast horizon and on the high-yield bonds for the long-term forecast horizon. The dynamic Nelson-Siegel factor state space model, however, becomes appealing on the high-yield bonds in the short-term forecast horizon, where the factor dynamics are more likely time-varying and parameter instability is more probable in the model specification.
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Bibliographic InfoArticle provided by Elsevier in its journal International Journal of Forecasting.
Volume (Year): 27 (2011)
Issue (Month): 2 (April)
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Web page: http://www.elsevier.com/locate/ijforecast
Term structures Treasury yields Corporate yields Nelson-Siegel model Factor model AR(1) VAR(1) Out-of-sample forecasting evaluations;
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